Becoming a great investor doesn’t just happen by chance. Just like any other practices, it takes time and effort. Often times, people approach investing with the “trial and error” mentality and learn by making mistakes at their earlier stages. Sure this is one way to learn. But it’s not an effective one and certainly not worth the consequences.
If there is one magic word that marks the key to success in the investing world, it would be knowledge. Expert investors study the market. They do their research. And they make informed decisions based on calculated risks. But this doesn’t mean that investing is only meant for those who are financially savvy. In fact, anyone can become a great investor. You just have to be willing to put in the work.
So here are 3 ways that can help improve your investing skills:
Understand the Basics
Before you invest your first dollar, you need to understand the basics of investing. This means you need to memorize some important financial terms. This is crucial as it builds the foundation for a successful investing journey. If you haven’t already done so, please check our previous article called “4 Important Tips for Beginner Investors.”
As a serious investor, you need to look at numerous factors to determine whether a given stock is worth the investment. One big factor is knowing the company’s value. And the most basic way to know is through market capitalization (market cap). Market capitalization is simply the multiplication of a company’s individual stock price by its outstanding number of shares. For example, if a company has 2 million shares and sells $8 for each stock, the market cap will be $16 million.
There are 5 basic stock categories of market capitalization:
- Micro-Cap: These stocks refer to companies that have a market cap between $50 million to $300 million. As the companies represented here are smaller, their stocks tend to be riskier and more volatile.
- Small-Cap: Small-cap stock companies have a market cap that ranges from $300 million to $2 billion. These companies usually have a high stock price, but they have relatively fewer available shares.
- Mid-Cap: Mid-cap companies have a market capitalization between $2 billion and $10 billion. A mid-cap stock usually combines the growth potential of small caps while retaining the safety of large caps.
- Large-Cap: This category of stocks is usually reserved for conservative, or “safe” stock investors who are looking to gain steady appreciation in a long period of time. The market cap ranges between $5 billion to $25 billion.
- Mega-Cap: These stocks refer to companies that have the largest market cap above $300 billion. Companies such as Apple, Amazon, and General Electric are few examples of mega-cap stocks.
Large-cap stocks are considered safer than small-cap stocks. They tend to generate a steady appreciation and poses little risk. Small-cap stocks are considered more dangerous but they fare better in terms of potential growth. Depending on what your goals are, you should choose one or the other. While market capitalization is important to consider when investing, you shouldn’t invest in this one factor alone. Always make sure to research the companies before you invest and know which investment strategy fits well with your goal.
Take Care of Your Finances
One critical aspect of becoming a successful investor is prioritizing your finances. This means you need to know how much money you have and how much debt you currently owe. A journey won’t start unless you know your starting point. As for your investing journey, understanding your current financial situation is the starting point. Overlooking this part can cause you great pains later on.
To do this, a helpful tip would be to first know your own net worth by creating a personal balance sheet with a list of your assets and liabilities.
(Saving and Investing: A Roadmap To Your Financial Security Through Saving and Investing, 5)
Your “assets” are anything of value that can be converted into cash and your “liabilities” represent your debts. To calculate your net worth, you need to subtract your assets with liabilities. If your assets exceed your liabilities, that means you have a positive net worth. And vice versa, if your liabilities exceed your assets, then you have a negative net worth, which essentially means you owe more than you own.
Knowing your net worth is important for two reasons: one, it can help you determine where you stand financially and two, it’ll give you perspective on how far or close you are to reaching your goals. For example, if you have a negative net worth, you can develop a plan to pay down your debts while increasing your weekly and monthly savings. Or if you have a positive net worth, you can continue staying on the right track until you can meet your financial goal.
Another way to understand your financial situation is to know your income and expenses. Jot down your monthly income and make a list of what you spend on each day. This could seem trivial and unnecessary, but you’ll be surprised at how large your expenses can add up to in one year. For example, if you spend $3 dollars on coffee each day, that will become $1095 by the end of the year.
(Saving and Investing: A Roadmap To Your Financial Security Through Saving and Investing, 9)
If you find that you have no money to save or invest each month, then you know you’ll need to cut back on spending. One common misconception that people seem to have about investing is that you need large amounts of capital to start. That’s not necessarily true. You can start investing with as little as $25 dollars. But even little amounts can seem large if you don’t have any money to save up at the end of the month.
Choose Your Investing Strategy
An obvious way to measure your competence as an investor is to know which investment strategies work best for you. Successful investing isn’t just about what you invest. It’s also about how you invest. Just as a football team won’t play without a playbook, you wouldn’t invest your hard-earned money without a decent strategy.
Below is a list of 5 most commonly used strategies that investors use.
- Growth Investing: This strategy mainly focuses on building large capital gains from emerging small companies. Those who adopt this style usually believe that the company’s value will grow exponentially. While this type of investing is attractive to many people, it is also extremely risky.
- Value Investing: Popularized by Warren Buffett, value investors actively search for stocks that are underpriced in the market. This process requires discipline and lots of research. In many cases, however, prices in the stock market overreact to sudden news — whether good or bad. As a result, prices can become deflated and this gives value investors the opportunity to make large gains.
- Income Investing: Investors who adopt this strategy receive a steady stream of income through their investments. They don’t need their stock values to spike. Instead, they just prefer their stocks to perform consistently well. Generally, income investing takes two forms: dividends and bonds.
- Small Cap Investing: This type of investing takes on the most risk. As the name suggests, investors who prefer this strategy purchase stocks of small companies that have a market cap between $300 million to $2 billion). Small cap investing is usually only done by experienced investors as they tend to be more volatile.
- Socially Responsible Investing: Also known as social investment, this particular strategy deals with how your investments can positively impact the world at large. Meaning, if you are a human rights activist, you can tailor your portfolio to invest in companies that align with your passion and avoid those that get in the way.
A great way to figure out which investment strategy works well with you is to know what your end goal is and which style best fits with you. For example, do you prefer a conservative or aggressive style? If you prefer the latter, maybe small-cap investing can be good since you look for innovative companies with potential for high growth. Or if you are a conservative investor, then perhaps income investing works the best since you prefer companies with steady growth over the long-term. Whichever strategy you choose, always remember to weigh your options and pick the one that matches your comfort level.
Becoming great at something usually requires a lot of work. Investing is no different. To succeed at investing, you must have the patience and the discipline to research and study the market on a consistent basis. Most importantly, you need to keep a steady pace so that you can last long-term. Don’t go all out at the beginning and burn yourself out. Think of investing as a journey you’ll take with you for the rest of your life.